Is a National Health and Hospitals Network Progress?

CPDS Home Contact Commentary on 'Directions for Health Reform in Australia'
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A National Health and Hospitals Network: A Progressive or Regressive Move?
(Email sent 4/3/10)

Adam Cresswell,
The Australian

Re: 'Tough medicine left for another day', The Australian, 4/3/10

I should like to strongly endorse the suggestion in your article that the Federal Government's proposal for A National Health and Hospitals Network is merely addressing part of the health system, and also to submit the the problem goes even deeper than you indicated.

My interpretation of your article: The proposed changes primarily involve process. This may bring benefits, but won't do so quickly. It doesn't involve extra Commonwealth spending. It sensibly would increase national standards and accountability, and create a more sustainable financial structure. Coal-face clinicians will gain more say - rather than block funding of unsatisfactory state services. But questions about how this would work are unanswered, as are relationships with other aspects of the health system that haven't been mentioned (eg problems in accessing services / being admitted to hospitals (especially for aborigines and those in the bush); financial sustainability; safety and quality; workforce shortages; inefficiency; and fragmentation of care).

The problem may be even more serious than your article implied, as the proposal does not actually seem to be addressing the main source of problems in the health system (ie improving medical services is arguably not the key to dealing with the potentially budget-crippling rise in health costs).

Moreover the proposal seems likely to exacerbate a primary cause of the pervasive dysfunctions in Australia's federal system of government (ie it would use the imbalance in access to tax revenues to centralize control over many medical services, and thus inhibit their effective linkages with other related functions and increase the risk of locally-inappropriate outcomes).

My reasons for these suggestions are outlined below.

John Craig

Details +

Detailed Argument

Medical Services: Solving the Wrong Problem?

While I am anything but an expert in the provision of health services, it seems clear that there is an emerging view amongst experts that more / better medical services would only involve dealing with symptoms of problems that lie elsewhere (eg in deteriorating environmental and nutritional quality that contributes the chronic degenerative diseases that were largely unknown to earlier generations, and whose costs are the main factor in blowing out health budgets). Indicators of this problem are documented in The Nature of the Health System in Commentary on 'Directions for Health Reform in Australia' (2006).

One problem with the Health and Hospitals Network proposal is that at best (ie if control by a cost-obsessed federal bureaucracy and political cronies could be contained) the Network would be controlled by clinicians, who (while well placed in relation to medical services) are arguably not experts in the areas where most current emphasis seems to be needed to improve the health system generally. Thus even if the proposed arrangement increases efficiency in the provision of medical services, the proposal leaves unanswered the question of how the non-medical issues (which, if successful, would contain the demand for medical services) are to be addressed.

Centralised Public Administration: the Big Problem

Australia has a federal system of government. Under its original constitution most functions were retained by states, and only a defined set of powers were assigned to the federal government (ie related to then-perceived 'national' issues such as: trade; communications; defence; quarantine; currency; banking and insurance; weights and measures; aliens and foreign corporations; pensions; immigration; external affairs) though involvement in some state functions was allowed where states agreed.

However over the past century control of many other functions has been increasingly centralised (by exploiting the federal government's external affairs power, and by shifting the tax revenues needed to undertake government functions to the federal government).

This has contributed to increasing inefficiency and ineffectiveness in the performance of government functions generally, by distorting state administrations and leading to duplication, overlaps and a 'blame game'. The distortion of state administrations (by enforcing centralised / financially-focused control within state governments, and a political emphasis on lobbying for funding rather than with getting on with the job) has rendered the state governments virtually incapable of performing, or being held democratically accountable for, their nominal functions - see Federal State Fiscal Imbalances (2003).

Centralized planning and control can't work for government functions (either within states or across the federal-state interface) any more than it can work for an economy - because the information needed to make appropriate decisions is too complex and dispersed to be assembled by central planners - see Strategy Development in Business and Government (1997). Centralised planning and control of government functions will inevitably: (a) result in devoting efforts to inappropriate outcomes; (b) break linkages between the function being centralised and other functions - whose effectiveness depended on maintaining strong local relationships; and (c) alienate those whose contribution and commitment is vital to success. [and (d) suppress initiative and innovation (note added later)]

This constraint can be illustrated by the increasing crises the Queensland Government experienced following its adoption of highly centralised strategic planning arrangements in the early 1990s under the Goss administration. For example, a process of budget-linked centralised planning and control was put in place, but:

  • a crisis emerged in the electricity network when those seeking primarily to use electricity GOC's as a revenue source to improve the government's bottom line proved unaware of the need (which would have been obvious to those with operational involvement) to upgrade the distribution network - see Failure in Queensland's Electricity Distribution Network (2004);
  • a crisis emerged in Queensland's health system (related to incompetent medical practices at Bundaberg's hospital). Though official inquiries were limited to seeking internal bureaucratic scapegoats, the real problem seemed to be that unrealistic centralised pressures imposed by the state's machinery of government generally had created a chaotic environment in Queensland's health department - see Intended Submission to Health System Royal Commission (2005). The effect on Queensland Health of centralised state efforts to remotely dictate policies and outcomes, seemed very similar to the disastrous effect on state governments as a whole of decades of federal government attempts to enforce 'national' aims and objectives; and
  • a crisis emerged in SE Queensland's water supplies, because recognition seemed to be lost of the professionally widely-known fact that the largest dam in the region (Wivenhoe Dam) had been built for flood protection but was not a reliable source of water supply (because its catchment was subjected to very large rainfall events, but these were infrequent and unreliable) - see Structural Incompetence and SE Queensland's Water Crisis (2007);

In order to deal with the many challenges Australia faces, whether in providing infrastructure or other public goods and services, the primary requirement is to build the institutional capacity to address those needs.

Centralization of planning and control both within state administrations and across the federal-state interface is arguably one major obstacle to progress, and the current Federal Government's proposal for centralized control of a National Health and Hospital Network would seem to exacerbate, rather than reduce, this difficulty.   

Coordination can be promoted without centralised control by: providing information; promoting collaboration; and encouraging decentralized initiative.

Addendum A:  Making a Bad Situation Worse? Addendum A: Making a Bad Situation Worse? CPDS Conclusions

It seems to the present writer (on the basis of observing the evolving debate, and considering 'machinery' issues without claiming any 'health' expertise) that the compromise proposal for changing Australia's health and hospital system adopted through COAG in 2010 could make the past management of these functions look like the 'good old days' in a few years time, because:

  • it is likely to prove impossible to define 'efficient prices' for health services (as prices that give appropriate signals need to vary to balance changes in willingness-to-pay against local willingness-to-provide and can only realistically be set in a competitive market). Given the reported centrality of idealized / administratively-determined 'pricing' to federal / state arrangements for hospital cost sharing, the compromise agreement reached through COAG seems no more likely to be workable than Soviet-style economic models;
  • planning the expansion of health / hospital services could be difficult as the agreement creates a type of purchaser / provider arrangement (with the federal government as purchaser of state hospital services at so-called 'efficient prices'). Providers (states) would be unable to plan facilities on the basis of (say) demographic trends because this would lead them to financial hazards due to their dependence on administratively-determined and thus unreliable 'efficient prices'. A parallel can be considered with the adoption of a purchaser / provider split for government functions by Queensland's unfortunate Goss Government  which contributed to problems in planning infrastructure. Neither the purchaser nor the provider components of previous-integrated agencies were left in any realistic position to plan - and intense pressure for cost savings tended to simply result in the continued growth of backlogs;
  • the COAG agreement was criticised for its failure to take inefficient state bureaucracies out of the hospital management process. Even more significant however is that the agreement is likely to compound some structural causes of state inefficiency (ie those related to federal attempts to control their operations) - a problem which affects all government functions and reduces the benefits the community gains from its taxes;
  • nothing has been done to alleviate problem in the management of government functions generally (including health and hospitals) as a result of poor assumptions in recent decades about tactics to improve Australia's economic productivity involving the application of business-like / market methods within governments. The resulting constraints included staff politicisation / de-skilling and fragmentation of government activities whose complexities / inter-relationships require effective collaboration if they are to be properly managed;
  • efforts by the Commonwealth to closely supervise states in order to increase efficiency and reduce hospital costs are likely to prove counter-productive because this fails to recognise the nature of government's core role (ie 'governing' rather than service delivery), and encourages dominance by those with mid-level operational skills, rather than those with skills relevant to effectively organising health / hospital systems as a whole who have the greatest potential to achieve major gains in efficiency and effectiveness;
  • the emphasis on hospital / medical services under the proposed arrangement seems counter-productive because (as noted above) such services are arguably not the only (and perhaps not even the highest) priority in improving health outcomes and reducing associated costs;
  • changes to funding arrangement can not actually reduce the long term hospital / health funding crisis that appears to confront both federal and state governments.  Attempts to use the power of the federal purse to force changes biases the outcomes that can be achieved away from issues that 'health' professionals believe important and which, if addressed, could ultimately do most to also improve financial outcomes. As suggested below methods involving dissemination of information / ideas and encouraging grass-roots initiative without attempts to impose centralized controls would probably be more effective;
  • if a Commonwealth controlled regional health network were established, it would be likely to impede effective coordination between health functions and other related regional issues;
  • the taxes which states use to pay for their share of health / hospital costs are economically inefficient, because of serious defects in Australia's federal fiscal arrangements;
  • the longer Australia's political system continues to tie government machinery in knots with the types of 'reforms' that have led to increasing problems over past decades, the greater Australia's prospect is of achieving a true 'banana republican' status.

In any effort to change a complex system (such as Australia's health and hospital system) there is a contest between new ideas (ie what might be better) and reality (ie what already exists, what else is going on). Making change by imposing reformist ideas (eg by restructuring, or increasing central controls on (say) outputs / outcomes, simply on the basis of reformer's ideas) is likely to generate ongoing dysfunctions - because many complexities in the existing system and emerging issues will be neither recognised nor accommodated. Queensland's experience in the early 1990s demonstrated how the autocratic enforcement of the limited ideas available to inexperienced 'reformers' could actually make a bad situation much worse (see Towards Good Government in Queensland, 1996).

Strategic management (which involves posing strategic questions and requiring existing practitioners to suggest how they should be answered, and then to progressively adjust without strong central controls) is likely to be the most effective means of changing such systems because it mobilizes all necessary information and the commitment of those with the practical knowledge and experience needed for successsful ongoing operations (see Strategy Development in Business and Government, 1997 and Outline of 'Changing the Queensland Public Sector, 1990).

Thus effective reform of Australia's health / hospital system now is most likely to be achieved by a reduction in attempts at fiscally-based central control and supervision by the federal government.

Alternative tactics might involve:

  • substantially reducing Australia's federal fiscal imbalances through new taxing arrangements;
  • encouraging ongoing initiative within existing health and hospital systems from day one - involving approvals through established accountability procedures;
  • stimulating study of diverse options for improving health and hospital systems (such as:  prevention; nutrition and health; 'public' health measures; linkages between health / hospital / aging functions; eHealth; legal framework and governance structures for hospitals; education and training of health / medical personnel;  health / medical research; international trends and experience relevant to health practices; successful innovations in Australian health practices; demography and health; funding mechanisms; and rejuvenation of government administrations relevant to health);
  • undertaking those studies such that: (a) more than one approach is taken to each topic; (b) investigations are led by different teams Australia-wide - so that informed experts are accessible in most regions; (c) study results are placed in the public domain; and (d) stakeholders in the health and hospital systems are made well aware of what is being done and how access to information can be obtained;
  • promoting debate and networking concerning opportunities to address emerging challenges amongst stakeholders in all aspects of the health / hospital system and in related functions (eg through: conferences; public access to lists of relevant contacts; and media coverage);
  • seeking proposals from within existing institutions for reforms following the study period - with such initiatives once again being subject to approvals through established accountability procedures; and
  • monitoring and reporting on the overall process, leading to a review of progress and further proposals in (say) 3 years.
Addendum B: Others' Views +

Addendum B: Other's Views

Some observers saw virtues in the types of reforms the federal government proposed.

Federal government has increased its share of health funding and now needs to consider how it can get most value for money. Problems in home insulation program do not invalidate increased commonwealth responsibility for health - though PM contributed to concerns by threatening states. Main issue is structural problem in dealing with multiple government funders inhibiting patient-oriented system in face of aging population. Activity funding of public hospitals would extend Victoria's successful purchaser / provider model - and allow: better hospital governance; less politicisation; and increased local professional oversight.; more even public / private playing field;. Another sensible option would include full Commonwealth responsibility for non-acute aged care - while states deal with disabled under 65 - as this would clarify funding responsibilities. NHHRC has suggested other reforms (eg primary / preventative are - which would shift responsibility towards commonwealth but not would not solve central structural problem; and proposals for Medicare Select) . Tony Scott (Melbourne Uni) argues that international evidence suggests that commonwealth funded regional model would be very effective. Even if federal government doesn't support takeover, there is a need for measures to improve regional planning. PHI reform should involve specifying fund's obligations for their members to be eligible for assistance (rather than Medicare levy exemptions) (Podger A., 'Evaluating successful health models', Australian Financial Review, 2/3/10)

CPDS Comments: The need to improve regional planning (and coordination with related functions) in relation to health and hospitals is undoubted. However a Commonwealth funded regional model would essentially transform hospitals into an extension of the federal government and thus outside the framework whereby they could be coordinated with other functions through state government machinery. Coordination in planning would tend to be ineffectual (a fact that has long limited the regional contribution of universities) or a complex matter requiring high-level control by intergovernmental relations staffs, rather than by those who know anything much about health issues.

 Money matters as well as the interests of patients. The health system is inefficient - mainly because of divided responsibilities which leave both levels of government with insufficient power. Efficiency must be increased because of the prospect of massive further increase in health costs. Rudd's plan attacked not just the symptoms (eg long waiting lists) but also causes. Lines of responsibility are much stronger. The federal government will be able to dictate the terms for hospital funding, and have total control of primary care. This is effectively a 'purchaser / provider model' - paying 'efficient prices' as set by an independent umpire. Victoria's system which involves case-mix funding seems to be working better than others. Making payments to small groups of hospitals will provide power to local level and permit responsiveness to local needs and innovation. Requiring states to pay 40% of efficient price ensure that they are stakeholders in success of the system. Total federal takeover of GPs and primary care should reduce duplication, service gaps and cost shifting. Given the transfer of state GST revenues to federal government, the changes should be at no net cost to federal government over 3 years. In later years cost increases will be covered by taxes that are more efficient than those states would have had to levy [Gittins R., Rudd reform plan to treat causes of health pain, Business Day, 8/3/10]

CPDS comments:

The presumption that a valid 'efficient price' can be set by an independent umpire seems over-optimistic (see also below), and reminiscent of the expectation that regulators could determine the proper price for coal exports through Dalrymple Bay Coal Loader. Their failure to be able to do so (arguably because there is no such thing as a fixed price which has the same effect as the variations in prices that occur in a market at different stages in the investment cycle) was seen as causing serious infrastructure under-investment (see Privatization of Monopolies Leading to regulatory Failure).

The obstacles to effective integration of federally-controlled hospitals within state-level coordination processes (and the parallel in that respects with universities) was noted above.  The parallel with universities might be further extended by noting the deterioration in their regional contribution associated with federal government takeover and the adoption of strongly commercial goals. The contribution to public policy debates (on which the effectiveness of state political systems critically depends) deteriorated markedly.

The taxes which states would need to apply to pay for hospital systems are relatively inefficient because of the gross imbalances in federal-state tax capacity (see Vertical Fiscal Imbalance), and that imbalance is a major contributing factor to the lack of efficiency and effectiveness of state administrations (see above) as well as distorting priorities for economic development initiatives by governments

However it was suggested by many others that practical issues related to the National Health and Hospital Network remain to be answered.

Federal government created a major problem for itself by promising to take over hospitals if state performance did not dramatically improve. There are serious problems. Trying to use financial power would (a) require creating new layer of bureaucracy and (b) run into constitutional problems as high court has raised questions about the ability of commonwealth to spend outside its constitutional responsibilities. Commonwealth could use its power over corporations - but create a system of even greater confusion between state and federal roles. Using corporations power to expropriate hospitals could also be considered - but would raise huge constitutional / financial questions. (Craven G 'Tell em they're dreamin', AFR, 1/3/10

Problems with the government's proposed hospital plan include: (a) it won't solve health care funding crisis - because while states (who don't have the financial resources) have been relieved of responsibility - the federal government does not have them either; (b) taking 1/3 of GST revenues from states will allow federal government to pay its share of health costs - but will make it impossible for states to pay their shares. Intergeneration report projects GST revenue as 3.5% of GST over next 40 years - so 1/3 would be 1.15% of GDP. Federal hospital spending is projected to be 1% of GDP now rising to 1.1% in 2019-20. Thus GST revenue gained would equal federal share of hospital costs - and this is only due to rise by 0.2% of GDP. So shift would be major gain for federal government at expense of state (c) arrangement won't stop cost shifting - as 40% of costs would still come from states - who also would have key planning functions and own hospitals / employ staff. (d) case-mix funding doesn't necessarily improve efficiency - as such gains could be at the expense of quality and lead to a tendency by hospitals to seek to avoid the most difficult / costly cases. This requires low-cost hospitals to subsidize others, which European experience shows to undermine the incentive to be efficient. (Ergas H., 'Health FAQs for the confused', Australian, 5/3/10).

Federal governments reform proposals do not provide for competition. Proposal involves a 60:40 split in hospital funding between commonwealth and states. It used to be 50:50 - so little is changed. New proposal suggests that hospitals would be networked by the states. Many are already in such networks - and can't contain costs. Federal government hopes that payment of 'efficient costs' will force productivity gains - but this didn't happen in NSW. Greater efficiency gains might be achieved by competition between public and private hospitals. Another cost saving measure could be denial of services - for those who don't meet criteria related to age, cost and expected success (Harris T., 'Reforms are a muddle', AFR, 9/3/10)

Proposal does not ensure genuine local control of hospitals. It re-brands state bureaucracies and adds another layer of bureaucracy. Public hospitals should be funded nationally and run locally - but scheme has not gone far enough. Central planning by bureaucracies fails, and needs to be replaced by competition amongst independent producers. Local hospital networks would only be local bureaucracies. Establishing clear and exclusive responsibility for commonwealth is only effective option.  (Kasper W and Sammut J 'Healthy outlook for blame game', AFR, 9/3/10)

Victoria and WA have criticised federal proposals for lack of detail and of additional funding. Victoria also points to the need to simultaneously consider aged care. (Dunckley M etal 'States lash health plan', AFR, 10/3/10

Article in Medical Journal of Australia criticised reform proposal as not ending the 'blame game'. John Deeble (ANU) said plan left too many questions unanswered. Local Hospital Networks are vaguely defined; impractical and absurdly small. It might work in regions but not in cities where big teaching hospitals dominate - and city is region on its own. David pennington (Melbourne Uni) suggests that giving hospitals money is not always the answer, as disasters occurred at Bundaberg and Royal North Shore which were performing well in terms of numbers and budgets (Viellaris R. Expers blast reform', CM, 10/3/10)

PM's proposal for 200 locally controlled hospital networks funded by case-mix payments will achieve efficiencies and thus reduce queues. But it might cost more (with federal government paying 60% of cost of all procedures doctors propose). It will create imbalances in access / financing across regions. Someone in Canberra with no experience of balancing hospital costs can't reconcile competing demands of different doctors in diverse regions. States won't be able to contain staff costs as they pay only 40% of bills. Specialists will move to provide hospitals to avoid haggling over case-mix funding and salaries. The system would not fund GP services outside hospitals that might reduce hospital queues. There is a need for a simpler plan that can bring people to agreement (Gross P., 'Health program is theory not cure', AFR, 11/3/10)

While people like the idea of a federal takeover of hospital funding - the bigger problem is to improve primary care and thus keep people out of hospitals. The federal government has already indicated an intention to fund better primary care centres. However none of proposed reforms will solve the problem of cost shifting as long as states are involved in funding services.  (Connors E. 'The hospital cure: keep people out', AFR, 12/3/10)

More than 25% of small hospitals could be forced to close because, having only a small number of beds, they would not be viable under the proposed case-mix funding model [1]

PM's health and hospital reform proposal did not go far enough - as it was not a complete takeover. There would otherwise no longer be a Health Department in Queensland. PM wants the states to do the muscle work, because roof insulation debacle shows that federal government is not good at implementing policy. PM's proposal would result in two more layers of bureaucracy - one in Canberra and the other at local level just to untangle the state bureaucracy (and the latter will need to be increased to keep an eye on their federal counterparts). PM's proposal is so complex and dangerous that it will take years to discover its failure [1]

Proposed hospital reforms might help a bit but will not eliminate the main problem - the escalating cost to taxpayers of health care. Government says that its goal in not to do so, but rather hopes that (a) shifting growth in those costs to federal government will make paying these costs easier (b) 'activity based' hospital funding should increase efficiency and (c) other steps remain to be announced. However the scheme won't: eliminate the problem of cost shifting (as both states and commonwealth provide funding, hospitals are cheapest for people to use; states would control local hospital boards); more health services (including prevention) are needed outside hospitals; and small hospitals won't be closed even though case-nix funding would not justify them [1]

Productivity Commission chairman Gary Banks) urges caution over government's proposed health reforms - noting formidable task of working out how much commonwealth should pay for each service. The lack of consistent measures of hospital costs means that a lot of work would have to be done before plan could be implemented.  [1]

CPDS Comment:

Consider a parallel between the problem of defining prices for hospital services and that for handling coal through the Dalrymple Bay Coal Loader (see Privatisation of Monopolies Leading to Regulatory Failure). In the latter case the independent arbiter was severely criticised for their failure to set prices that encouraged expansion of the facility - because they sought to set prices which provided a fair return on existing capital. It seems that the problem was that the regulator 'failed' - because they could not define a fixed price which had the same effect as the variable prices that would arise as the result of market forces at different stages in the investment cycle.

The former Soviet Union (whose economic model involved the assumption that authorities could determine appropriate prices, rather than having these adjusted through a market) was not a standout success.

Surely something of the same problem arises in relation to 'efficient costs' for hospital services - as these would need not only to compensate service providers for the costs they incur using existing facilities, but to motivate them to expand facilities. And no fixed 'efficient cost' is ever likely to be able to do this satisfactorily.

'Authorities' who seek to define 'efficient prices' will find in impossible to either: (a) gather the information on current service provision required to determine what prices they cost 'efficient' providers; and (b) deal with the vastly more complex question of what prices would justify new investments. The latter have to take account of: complex changing technologies; the cost of capital; local circumstances; possible regulatory / tax changes; initiatives by other (including international) service providers - or the emergence of substitute services; changes in client needs to behaviour; changes by suppliers; staff availability; and so on.

There are alternatives to PM's ill-considered hospital scheme, The sort of consultations needed as the basis for change have not been done. Past reforms have emphasised the need for an integrated system and placing more emphasis on preventative and primary care and de-emphasising historically dominant role of hospitals. Medicare is outdated. A version of the managed care scheme that has been adopted in various countries would be more appropriate. Government funds for health should not be paid directly to hospitals but into funds which organise services for individuals - perhaps on the basis of contracting  (Richardson J., 'Rudd needs to think again on health', AFR, 8/4/10)

Reserve Bank board member Roger Corbett has labelled health reform proposals a bizarre and a formula for disaster. There is concern that the Commonwealth is announcing its proposals one element at a time rather than being able to be considered as a whole. Mr Corbett said that newly emerging proposals related to aged care illustrated why scheme would not work. Aged care services are hopelessly uncoordinated and run by federal government. Local hospital networks would simply add to confusion and require more public servants   (Maher S., etal 'Rudd health reforms bizarre', Australian, 12/4/10)

Nicola Roxton has shown that cost of funding Victorian premier's health proposals would be $38bn (including both primary care and hospital costs). This is the first time federal government has revealed likely cost of acceptable health care system. To date items have been dealt with as bits and pieces without revealing the overall picture. Varying slightly the amounts of health costs paid by different governments does nothing to address the main problem - namely the significant increases in funding needed (which means taxes have to increase and this can only seriously be considered in the light of Henry Tax review). Federal proposals also don't remove blame game as Victoria's diagram illustrating complex accountability show. Federal government does not seem to be dealing with system as a whole. NSW has now realized it would cost up to $1bn to implement new proposed regional organisations - and would not receive anything to help fund this. Large numbers of redundancies in state systems would need to be funded. Who would manage this. The states presumably - but as Commonwealth would be paying 60% it would try to step in and take control - thus leading to exploding blame game. The federal Department of Health and Aging is widely distrusted by the states, and if let loose to try to take control the result could be chaotic. Bad implementation of programs seems unacceptable when people's lives are at stake  (Baxter K 'Face up to the harsh realities of health', AFR, 13/4/10)

PM's 'activity-based' funding proposal could lead to hundreds of thousands of extra hospital admissions yealy - presenting new opportunities for cost-shifting and overcharging. This is illustrated in Victoria which already has activity-based funding. Victoria's hospital admission rates (eg for chemotherapy) are much higher than in other state. Unless pricing signals are adjusted so that day-care payments are no higher for admissions, then activity-based system will increase the rate of admissions [1]

It is wrong for Commonwealth to link payments for health care to state acceptance of his reform package. This makes patients into pawns in negotiations. The proposed reforms would be worse that Victoria's existing scheme. And while some support increased centralisation, international experience does not suggest that this is best. PM's plan would leave patients more confused about who is responsible, but more remote from government with primary funding responsibility. Local governance and activity based funding are needed for hospitals. But Commonwealths proposals are defective (a) state GST revenue is relabelled as commonwealth revenue (b) it makes no sense to consider funding arrangements before Henry tax review is released. An alternative plan is suggested involving (a) full state government responsibility; (b) a 50:50 funding arrangement; (c) more funding now; (d) national health performance standards (e) strong preventative / primary care action and (f) measures to increase efficiency (Brumby J. Pact for a genuine healthy outcome, The Australian, 14/4/10) 

A Response: Claims that Victoria's public hospital system is the best in Australia have been disputed. It performs well by some measures, but worse by others (Cresswell A 'Brumby's boast looking sick', Australian, 15/4/10)

National health plan is hollow. Victoria objects because it would have to wait 4 years for more funds and these would be partly paid for by GST revenues taken from states. Commonwealth now has all the power needed to drive change in health system. Redesigning political architecture to weaken the states won't help. What is needed is sufficient countervailing force to counter bad ideas - and states can do this better than small regional authorities. Commonwealth has not run a public hospital for 40 years. It is not clear why there would be any advantage in having Commonwealth run hospitals. PM seems to be merely playing the blame game to buy votes. When Commonwealth has operational responsibility it also will disappoint (Johns G. 'Brumby stands up to PM on health', Australian, 15/4/10)

COAG is dealing only with hospital funding, not health reform. Real reform requires ending system in which states are responsible for public hospitals while commonwealth pays ofr GP / pharmaceutical services - as this generates duplication and high costs. It also obstructs integrated cost-effective patient care. Best solution would be 100 federal funding, with COAG creating single new provider (a product of cooperative federalism) which would establish regional authorities which dealt with hospital / community and primary care for 500,000 people. Public support for PM's hospital only plan must reflect perceived need for change - rather than the specific / complex changes proposed. Public hospitals need more $ - but this would not be enough. Integration of hospital / community and primary care is what is critical. The hospital-centred system needs to be changed to one emphasising prevention / early treatment. No deal should be done on hospitals until commonwealth plans for primary care reform are done. While many agree that integrated care is needed, there is no commitment (Dwyer J 'States shouldn't sell out for pennies from Kevin', A, 20/4/10)

Premiers are mainly concerned with financing - but the key issue is how much value can be obtained for money. Health system is not well designed for emerging challenges. Reduced mortality and increased life expectancy raises problems of more chronically ill, more frail aged, more reliance on health system to continue increasing life expectancy. This is motive for a single funder model - which would allow resources to follow patients so patients can move between different parts of the system. Federal government only recently suggested how this could be achieved, and proposal is not encouraging. No coherent purchaser provider model is proposed. There are many things apart from funding that COAG needs to resolve (Podger A., 'Rescuing something from COAG', AFR, 19/4/10)

After an agreement was gained with most states in April 2010, there was considerable concern that though it involved significant changes it had not significantly improved the situation.

Health industry experts welcomed agreement which provided for large increase in hospital funding but warned that continued state control of pooled funding could restrict deeper structural changes that are needed. Australian College of Emergency Medicine (Sally McCarthy)  noted that this would not end blame game, and that noting had been done to speed e-health roll-out.  St John of God Health Care (Michael Stanford) noted that contracting private hospitals to treat public patients won't work - because large private hospitals are already at capacity. Consumer Health Forum (Carol Bennett) noted that most people just want better services and don't care who controls funding. Australian Nursing Federation (Ged Kearney) said extra funds had been provided only to buy state support - and would not flow to nursing (Mercer K. 'Can do better, says industry', AFR, 21/4/10)

Health plan may not sideline inefficient state bureaucracies. 80% of hospitals would not be covered by activity-based funding and states would control local hospital networks. AMA questioned who would be in charge of hospitals, and states refused to cooperate with local networks. Opposition claims proposal is just more bureaucracy. PM gained agreement to 60% federal funding of hospitals through community based boards - with states as managers of pooled funding arrangements (Franklin M., 'Rifts open in Kevin Rudd's health plan', A, 22/4/10) [Australian Primary Health Care Research institute said plan did not achieve original objective of commonwealth control of hospitals. Australian Healthcare reform Alliance (John Dwyer) said no significant reform was achieved. Menzies Centre for Health Policy (Stephen Leeder) said it was a beginning but a lot more was needed. John Deeble (architect of Medibank / Medicare) said it was a big shift, but that outcomes were unclear

CPDS Comment: The problem is not only that inefficient state bureaucracies were not (could not realistically) be taken out of the process, but that nothing was done to reduce the structural causes of their inefficiency (see Fixing Australia's Federation). In fact the ever increasing efforts by the federal government to supervise details of state operations is likely to merely compound the problem.

Public hospital funds will flow through three funds. States remain system managers of these funding pools - which raises concern for doctors about bureaucratic control   (Maher S 'Funding model breeds fear of managerial power', Australian, 22/4/10)

Local control has been sacrificed as part of deal to win state support - and many fear that this will generate significantly increased bureaucracy (Cresswell A. and Maher S. 'Rampant bureaucracy disaster waiting to happen', Australian, 22/4/10)

Two members of commission that provided the blueprint for PM's health reforms have criticised the outcome as perhaps worse for some patients (eg targets for emergency waiting times and elective surgery were seen as unrealistic; all consideration has been focused on acute care, rather than on existing / emerging gaps; extra mental health funding is seen as inadequate; bureaucracy would probably increase; little was done to help patients move from one part of the system to the other) (Cresswell A., 'Backers turn on Rudd changes', Australian, 22/4/10)

PM's deal is a messy / hesitant step. It is a bureaucratic peace deal drawn up after PM sought to invade state turf. Federal government will become dominant funder. But setting efficient prices for hospital services bureaucratically will be a daunting task. But states will maintain control over pool of funds, and hospital management. Hospitals are supposed to be more community responsive under centralised control. But they will also be scrutinized by new National performance Authority. Local hospital networks are also required to coordinate with federally funded community based primary care organisations. There is no mention of competition / private hospitals (Stutchbury M., 'Health deal, a tentative step towards efficiency', Australian, 22/4/10)

What did PM get for extra $4.5bn in funding needed to get states to agree. Hopefully faster treatment and shorter queues. He had hoped to be able to bypass inefficient state bureaucracies to reduce waste / inefficiency in public hospitals. But the deal falls short of this. Federal government will be able to put pressure on states by calculating national efficient-price for services - and provide 60% of the cost of this, requiring states to pay the balance. This should result in states pressuring for hospital cost savings. And while states will control local networks, this will be subject to federal scrutiny. Efficient pricing will be hard to determine and cause a lot of tensions. The blame game will continue - with federal complaints about inefficient hospitals and state complaints about inadequate 'efficient prices'. The biggest problem will however remain over-use of public hospitals because these cost patients little - and are thus use in preference to other services. The reform proposals based on public hospitals only will do nothing about this (Maley K., 'Rudd's public failure', 22/4/10)

CPDS Comment: On the basis of the above observations, the COAG 'deal' looks like a formula for disaster because:

  • defining efficient prices for hospital services must be impossible to do realistically (see above), so that this will be a constant source of tension between federal and state governments;
  • putting intense federal pressure on states to improve efficiency in hospitals can't be constructive, as (in Queensland, for example) pressure on the Health Department from a state Treasury to achieve cost savings (rather than effective health services) arguably distorted the management of health / hospital functions and contributed to the emergence of crises (see Problems Affecting Queensland's Health System; Eliminating Waste Inefficiently; and Queensland Administrative Desperation Unit);
  • the core role of government is 'governing' (ie creating a framework for social and economic transactions within the community) rather than the provision of goods and services. Major gains in efficiency and effectiveness can be derived from making governments effective in 'governing' - but this is seriously impeded by an obsession with operational efficiency because individuals with the skills to promote operational efficiency don't have skills relevant to dealing with 'big picture' issues (eg changing the way the whole health system functions). Moreover:
    • the core role of central government agencies involves creating a framework in which specialized agencies can deal with their functions (including coordinating those activities with other related functions). The ability of government as a whole to be effective is also severely impeded by giving priority to those with skills relevant to operational efficiency, rather than to those able to create the overall framework;
    • government involvement in provision of goods and services tends to be in functions which are subject to market failures, which inevitably are associated with complexities that make effective linkages between functions more important to overall efficiency than the adoption of (say) a cost-saving focus;
  • the more intensively the federal government seeks to supervise performance of state functions, the worse the ability of states to perform those functions must become (see Fixing Australia's Federation)

States are not in agreements about the size of hospital networks designed to take over direct administration of public hospitals (eg the federal government expects 90 such entities to be created nationwide, while Tasmania and ACT only want one each) [1]

Those with psychiatric illnesses will be worse off under COAG plan [1]

The new health agreement does not use incentives to keep down health costs. A lot of money will be thrown at health system. But basic governance problems have not been resolved. Thus problems must re-emerge. There is too little in the system to ensure that costs are taken into account in decision making [1]

CPDS Comment: There has been an unwise assumption that improved efficiency in the production of public goods and services has to be the major driver of efforts to improve the productivity of Australia's economy has been a major contributor to breakdowns in the functions that government is involved in (see Decay of Australian Public Administration). The latter notes that:

  • the assumption that business-like / market methods would be appropriate to improving efficiency does not recognise the obstacles implicit in public functions that are affected by real market failures;
  • politicisation of public administration (ie the dominance of 'yes men') has widely accepted, and has (a) prevented 'reality checks' on political ideology; and (b) encouraged purges of staff with more relevant knowledge / skills / experience than the favoured 'yes men'

Efficiency and effectiveness within government itself is more likely though more conventional methods for public sector management.  

Alternative and better means for lifting the productivity of Australia's economy are arguably available through accelerating market-relevant 'learning' within the market economy itself (eg see Lifting Productivity: Considering the Bigger Picture and A Case for Innovative Economic Leadership).

Huge amounts of money have been thrown at hospitals,  but community is only likely to see changes at the margins and little effect on primary care / mental health / e-health (Breusch J. 'Health equation is incomplete', AFR, 23-26/4/10)

Reforms fall well short of those PM promised. Premiers will be able to blunt drive for more productivity in hospitals, and continue blame game. Main gains are increasingly reliable funding for hospitals; less incentive for cost shifting. The main weakness is federal government's failure to gain enough leverage over hospital reform - mainly because states will be able to protect hospitals from activity-based funding (Mitchell A., 'Health regime will fall short', AFR, 23-26/4/10)

PM's health deal is a way of financing baby boomers - and involves doing nothing to really solve a problem that is just about to accelerate. The commonwealth has either taken on a large spending commitment, or removed revenue from the states which will slowly strangle them. However, whether its outcome, the deal is only about financial reform, not 'health reform'. For states the big problem is that by 2020 everything they gain from GST is likely to have to go into health - because health spending is growing much faster than nominal economy. There remains a need for real health reform (McCrann T 'Rudd's pill, a palliative, not a cure', Australian, 24-25/4/10)

Health package will prove costly (to Treasury and scheme's integrity). The blame game will continue, the bureaucracy will remain bloated, there is no genuine federal hospital takeover. Lines of responsibility in new plan are confused. Opposition might propose a complete federal takeover to shine light on PM's plan (Van Onselen P 'Health plan may convince voters but it won't stop blame game', Australian, 26-25/4/10)

David Penington (Grattan Institute), previously a supporter, has now criticised health reform proposal - because of lack of any governance agreement different from that at present, and lack of commitment to better interface between hospital and primary / aged care sectors. The COAG agreement degenerated into arguments about money and control - not about health-care reform. Hospital services will continue to be controlled by numbers (eg budgets / waiting times) - and quality won't improve. Local hospital networks need inputs from doctors / nurses, but implementation will now be controlled by state / commonwealth bureaucrats. Professor John Dwyer expressed doubts that hospitals would have computer systems needed to claim activity based funding. Doctors believed the process would be a nightmare, requiring a huge increase in bureaucracy. Professor Jane Hall (UTS) suggests that plan would be better than original, and would allow a different appraoch to planning and long-term funding to emerge (Cresswell A., 'Former ally David Penington savages Kevin Rudd's 'status quo' health reforms', Australian, 29/4/10)

COAG agreement was outcome of PM's commitment to take over health system if states did not fix it, but its workability is uncertain. The system is at a tipping point in terms of rapidly rising future costs. States were mainly concerned for public hospitals at COAG (as this is a major budgetary issue) whereas communities concerns are with health care more broadly (eg aged care, mental health). These are mentioned by COAG - but proposed governance arrangements would not ensure a more unified system. Over the past 15 years states have managed public hospitals with primarily budgetary goals - and those with medical knowledge had little control. Problems emerging in 2007 showed that such goals were inadequate. Medical considerations were inadequately reflected in management decisions. This was ignored by NHHRC and COAG. The need for management to be delegated to hospital networks was recognised - though this would not happen if state bureaucracies remained in control, and the linkages with other health functions would be poor while officials with limited backgrounds in those areas retained control. COAG referred to 'joint intergovernmental authorities' with funding but no policy / operational role. But there is a need for joint health services authority to oversee planning and service delivery - and this should be led by the Commonwealth as chief funder. UK reforms, which promoted partnerships between doctors and administrators at all levels have reduced problems in National Health Service (Penington D. 'Health system is still ailing', The Australian, 30/4/10)

There is continued disagreement about the COAG agreement on health and hospital reform - with many experts concerned. Some are concerned deal is hospital-centric, though doctors are not convinced it will change much. Some are concerned about lack of mental / dental / indigenous health emphasis. The deal reflected a politically driven compromise - and the funding arrangements will be very complex. The only workable solution is likely to involve setting hospital budgets on the basis of the previous years activity - which is hardly different to current practices (Cresswell A., 'The deal that led to disagreement', Australian, 1-2/5/10)

Criticism is growing over health reform plans - due to (a) failure to change doctor / hospital focussed health system; (b) increasing blame game (c) lack of clarity over which level of government is responsible; (d) likely increases in bureucracy and fragmentation [1]


Addendum C: Note on 2011 Changes to Reform Proposals Note on 2011 Changes to Reform Proposals

In February 2011, the Commonwealth Government obtained the agreement of all states to a revised reform package which involved: (a) states retaining their GST revenues; (b) a 50:50 partnership between states and Commonwealth in a national fund; the provision of substantially more federal government money; and more ambitious targets for hospital service delivery.

However the basis for managing this system remained the payment of 'efficient-prices' for the provision of services [1]. And as noted above, determining appropriate prices is essentially impossible, and attempts to do so have the potential to distort priorities.

Another Bad Health Deal? (email sent 15/2/11)

Alan Kohler

Re: A blow to state bureaucracy, BusinessSpectator, 14/2/11

May I respectfully suggest that your enthusiasm for the latest national health deal (and your suggestion that similar methods should also be applied to education and public transport) is likely to be misplaced? Your article argued that:

“By setting up an Independent Hospital Pricing Authority (IHPA) that sends money directly to Local Health Networks (LHNs) on the basis of an activity based funding model, the state health bureaucracies are being cut out of the picture. They could be shut down, but probably won’t be.”

The problem is that it is essentially impossible to determine ‘efficient prices’ that would be reliable as the basis of an activity-based funding model. Thus it is likely that the latest health deal will be as unworkable as the 2010 reform package would have been (see Making a Bad Situation Worse).

Brief explanation: The inability of central planners to determine appropriate prices in the absence of a competitive market was a major factor in the failure of the Soviet Union’s economy. And in a prominent Queensland case desirable export infrastructure remained undeveloped apparently because regulators were (unsurprisingly) unable to set fixed prices that had the same effect as the varying prices that apply in markets at different stages in the investment cycle. There is no reason to expect that the proposed Hospital Pricing Authority would be able to do any better.

Certainly there are inefficiencies in state bureaucracies that need attention. However the best solution would be to address the causes of those problems (eg increasing centralisation, public service politicisation, and naïve efforts to increase efficiency by applying business-like methods to governments’ non-business-like functions). Nothing will be achieved by trying to conceal fundamental weaknesses with a ‘Band-Aid’ (such as activity based funding).

John Craig

Email response from Professor David Penington, University of Melbourne  (received 15/2/11)
- reproduced with permission -


Thank you for your input. I wholeheartedly agree that the 'independent hospital pricing authority' has an impossible task. Presumably it will seek to handle the whole annual budget of the major public hospitals through case-mix funding, regardless of the differing award rates for nurses etc between states, and regardless of the fact that even in Victoria, with the longest experience of activity based funding, this still only covers a portion of the budget of every hospital with other components for various overall functions, which include amortisation of equipment and new equipment purchases.

I can see huge tensions arising, especially from NSW and Q'land, but probably also from WA as the detail comes to be worked out. In any event, there is likely to be a further federal election before the system could begin to run - almost certainly with many further transitional adjustments put in place once politically sensitive disputes break out!

States will inevitably need to have their own bureaucracies double checking everything as they remain responsible for the LHNs as State institutions and for funding the balance of any shortfall from the national body decisions.

I cannot find an email address for Alan Kohler, but fell free to forward this response to him.